In an FAQ[1] updated on May 13, 2020, the SBA appears to have mostly backed off the threat to review PPP loans of less than $2 million for improperly certifying their loan was necessary.

On April 29, 2020, Treasury Secretary Mnunchin and SBA Administrator Jovita Carranza issued a Joint Statement that read, in part:

To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Regulatory guidance implementing this procedure will be forthcoming.[2]

The statement specifically was issued discussing the review of loans and repayment before the then May 7 deadline to avoid having questions raised regarding the correctness of a borrower’s certification that a loan was necessary.

In the interim many small borrowers began worrying that they might face this scrutiny and a number went ahead and took advantage of the SBA’s safe harbor repayment date (which was extended until May 14) out of concern the SBA might decide their loan wasn’t necessary.

Now the SBA has effectively reversed course and, on the day before the repayment deadline, held that any loans totaling less than $2 million for a borrower and any affiliates will be deemed to have certified their need for the loan in good faith.

The new Q&A 46 reads:

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

In a footnote, the SBA reminds the reader where to find the affiliates rules for this safe harbor:

For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).

It is also important to note that, in the final paragraph of the answer, the SBA is also toning down the threats to borrowers who had larger loans, stating that they would be given a chance to repay the loan before any enforcement action or referrals to other agencies (such as the Justice Department) would take place if the SBA concludes their loan request was not necessary.

[1] “Payroll Protection Program Loans Frequently Asked Questions,” Small Business Administration, May 13, 2020 edition, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf (retrieved May 13, 2020)

[2] “Joint Statement by Secretary Steven T. Mnuchin and Administrator Jovita Carranza on the Review Procedure for Paycheck Protection Program Loans,” U.S. Department of the Treasury website, April 28, 2020, https://home.treasury.gov/news/press-releases/sm991 , retrieved April 29, 2020